William Stromsem, CPA, J.D., George Washington University School of Business
Because of a flood of new and potentially dubious claims for the pandemic relief Employee Retention Credit (ERC), on Sept. 14, the IRS announced a moratorium through the end of the year on processing new claims. It has also stepped-up enforcement activities in this area.
Scam Promoter Tactics
Your client may have been seduced by a promoter in a direct mailing, telephone solicitation or other advertising. These can be persuasive, and the IRS has identified warning signs of aggressive marketing tactics used, including claims of special expertise, an “easy application process,” and quick and generous refunds. The promotion may tell the taxpayer that he or she has nothing to lose by claiming the credit. All these claims are at least exaggerated if not entirely false.
IRS Responding Aggressively
The IRS has added phony ERC claims to its "Dirty Dozen" list of tax scams and has stepped up audits and enforcement activities. On July 25, IRS Commissioner Werfel said the agency is increasing scrutiny on dubious submissions, intensifying compliance work and adding procedures to deal with promoter fraud schemes. See details in IR-2023-135.
Helping Your Client
ERC promoters may have told clients that they have nothing to lose by claiming the credit, but that is not true. If the claim is not legitimate, the client will have to repay the credit amount with interest, and the IRS may assess penalties that can be severe, particularly if the claimed amounts are significant and the client was negligent or even complicit in the false claim. In some cases, the promoter may not have signed the return with the false claim, leaving only the taxpayer responsible for the issue.
Your client may be embarrassed to admit to falling for the scam and for using another person for tax services. The first you may learn of the issue is when the taxpayer approaches you after receiving a letter from the IRS that it is looking at the ERC claim. You may need a little sympathy for the client as a victim who needs your help. When your client receives an IRS letter, a fast and effective response may help minimize exposure to penalties. If a review of whatever has been submitted creates a potential problem for your client, in October, the IRS provided a Fact Sheet on how businesses can withdraw an ERC claim. Withdrawing the application could help portray your client as a misled victim and help avoid some penalties for more egregious conduct.
You may have clients who have fallen for an ERC scam but have not yet received letters and reached out to you. Again, prompt and effective actions may help avoid penalties, so consider proactively addressing the issue in client newsletters or other communication to advise them to consult with you about any claims that they have filed or that they are considering filing. The IRS is advising clients to do just that—to seek help from a trusted tax professional and not to go back to the original promoter.
If your client is legitimately entitled to the ERC, you can offer to prepare the claim forms. However, with the IRS sensitivity to abuses and likelihood that the claim will be reviewed, some extra due diligence by you might be wise. Your client should understand that you are preparing a quality product for a fair fee, and that this is different from the boilerplate, one-size-fits-all applications and percentage of refund contingent fees that are offered by ERC mills. But with your services, hopefully the client will be able to sleep better at night.